{"id":407954,"date":"2025-09-08T13:58:25","date_gmt":"2025-09-08T13:58:25","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/407954\/"},"modified":"2025-09-08T13:58:25","modified_gmt":"2025-09-08T13:58:25","slug":"the-us-economy-is-at-a-turning-point-and-the-stakes-are-higher-than-you-might-think","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/407954\/","title":{"rendered":"The US Economy Is at a Turning Point\u2014and the Stakes Are Higher Than You Might Think"},"content":{"rendered":"

On this episode of The Long View<\/a>, Joe Davis, global chief economist at Vanguard and global head of the firm\u2019s Investment Strategy Group, explains why economists needs to pay attention to what he calls \u201cmegatrends,\u201d how the US economy is unlikely to stick its status quo, and lessons for investors from his new book called Coming Into View: How AI and Other Megatrends Will Shape Your Investments.<\/p>\n

Listen to the full episode of The Long View Joe Davis: How to Capitalize on \u2018Megatrends\u2019 <\/p>\n

Vanguard\u2019s global chief economist handicaps the odds of recession and higher inflation and discusses how investors can thrive in an era of AI, aging populations, and a rising US deficit.<\/p>\n

\"Image<\/a><\/p>\n

Here are a few highlights from Davis\u2019 conversation<\/a> with Morningstar\u2019s Christine Benz<\/a> and Dan Lefkovitz<\/a>.<\/p>\n

Why the Status Quo for the US Economy Is Unlikely to Persist<\/p>\n

Dan Lefkovitz<\/b>: So, there\u2019s this fundamental premise in the book, Joe, that the status quo for the US economy is unlikely to persist\u2014status quo regarding growth, inflation, financial returns, even. Why is that?<\/p>\n

Joe Davis<\/b>: And this was a surprise, the eye-opener for me. In full disclosure, I\u2019m asking my role at Vanguard, chief economist, I felt these what\u2019s called consensus surveys. What\u2019s the outlook for growth, GDP, or inflation, where the stock market for the next three, five, seven years? And for GDP growth and inflation, I put down what most put down, which is 2% growth and 2% inflation. I wasn\u2019t being lazy. Maybe there\u2019s comfort because everyone else says the same thing. Virtually 90% of the economists say the same thing. And I\u2019ve been in that crowd because it was kind of like, I\u2019m probably indirectly, I was doing in my head in a more narrative sense, well, we\u2019ll have a little bit of lift from AI, a little bit, but we\u2019re going to have slower demographics through the aging of the baby boom. And so, net-net, we\u2019re going to be roughly at the same growth rates and inflation 2%; 2% as we have on average for the past 10 or 15. Hence status quo, no real change.<\/p>\n

It was only when we developed this data-driven framework did I see that that was just a lower-probability event. Effectively, we have trouble generating that as greater likelihood than 20%. Because of the push and pull of these medium-run forces, and in particular, the push down on growth and up on inflation and interest rates from our deficits, because they\u2019re structural and they compound over time versus on the other hand, AI\u2014I\u2019m calling it AI, although it could be another technology, but AI is probably the most likely one\u2014AI pushes up growth and keeps inflation at bay. And what I was surprised to find is the push and pull of those dynamics over the next three or five years generates effectively statistically a bimodal outcome, which is not the normal sort of status quo distribution where you get 2% on growth and inflation with the risk of a little black swan on either side. It\u2019s just very unlikely we\u2019re going to get that sort of fulcrum. It\u2019s more of a seesaw. And one of those forces is going to push us one way or the other.<\/p>\n

Will AI Be Able to Win the Tug of War Against Aging and Rising Deficits?<\/p>\n

Christine Benz<\/b>: So, let\u2019s follow up on that, Joe, because in the book you talk about two possible outcomes from that tug of war. Can you walk us through that? So, this is a tug of war between technological innovation, probably AI, and an aging population and rising deficits.<\/p>\n

Davis<\/b>: So again, we\u2019re incorporating a lot of forces that could matter\u2014geopolitical risk and uncertainty, even climate. But you nailed it on the head, Christine, in terms of the two that rise to the top: aging and deficits on the one side, which push up interest rates and the prospect for technological change, much like we saw in the 1990s, if you recall, and the computer and the internet on the other side. We don\u2019t always get these sort of seesaw dynamics because we\u2019ve tested this framework back 130 years. It\u2019s just there\u2019s times in history when these megatrends are pushing in certain directions.<\/p>\n

So, let\u2019s break it [down], each one. The more optimistic one is the most likely. And I think what\u2019s powerful is from a risk management perspective, we\u2019ve put odds and quantified the probabilities and magnitudes of this. So, it\u2019s roughly a 50% chance that over the next five to seven years, we will see GDP growth that\u2019s meaningfully above the consensus expectations, so roughly over 3% for the United States, well above consensus expectations, roughly double them. And we get that with our deficits not being a serious issue. It doesn\u2019t mean we\u2019ve grown out of them. It doesn\u2019t mean that they\u2019ve gone away. But like the late 1990s, we don\u2019t talk about it because we have strong earnings growth and economic growth. And we get that along two dimensions of AI.<\/p>\n

The first one is it starts to lift automation. Yes, there\u2019s significant job disruption, some job loss. But the fact is, is that through our framework, the biggest issue with the US economic growth is that we have a lack of automation. It\u2019s subtracting the most from economic growth in 130 years. And we know this because of our framework incorporating all these factors. It effectively comes at the right time. It effectively means\u2014and I didn\u2019t know this until we quantified it, Christine\u2014it effectively means that the rest of the baby boom that is retiring right now\u2014we\u2019re in peak age, 65, right now in the United States. The number of people who are age 65 is peak in the year 2025\u2014it\u2019s effectively that that generation from here on through, say the year 2032, it\u2019s as if all of those Americans, those individuals do not retire at all because of the lift that AI comes to offset some of that loss in the labor force.<\/p>\n

So, demographics don\u2019t become destiny because of technology\u2014and we\u2019ve seen this multiple times before\u2014that is a very positive dynamic. In effect, we grow into the valuations that we have in the United States. And from a positive investment perspective, the greatest beneficiaries are outside of the US technology sector. It\u2019s in the US; it\u2019s the areas that have really dragged. It\u2019s outside of effectively the Mag 7, because AI makes a value-based company, say healthcare or finance, a little bit more productive. And then you get some new products. I wish I knew what they were because I\u2019d be able to retire from Vanguard, but I really don\u2019t know what they are.<\/p>\n

And it lists a little bit of the valuation. You go back to your fair question, Christine, on outside the US. We\u2019ve seen this in other second halves of other technology cycles. The non-US sectors do a little bit better. So, I would call that a good convergence, and AI wins, and deficits don\u2019t really rear their head, at least over the next seven to 10 years. However, you can see where a lot rests on AI. AI is important. It will have some effect. It\u2019s already having a modest effect on growth. But if it does not continue to progress, which means advancing its capabilities, and our projections show that more often than not, they do. But there\u2019s a one-in-three chance because we\u2019re still early here, that it plateaus at a lower plane. And if that happens, you can see now where we have not gotten the lift through automation, new products through, let\u2019s call it AI. We have GDP now through no lift in innovation. We now have demographics dominating. We have GDP growth not at 2%. Now it\u2019s starting to inch closer to 1%. Our deficits, however, still now are 8% or 9% of debt to GDP in peacetime, so without a recession. That starts to push up inflation expectations in our framework. The Federal Reserve, however, fights that, which only leads to another modest headwind to growth. So, you get a higher interest rate environment without the growth dividend with it. And you have equity markets that are not prepared for that. Earnings are starting to disappoint because you have lower economic growth. And you can see the flywheel goes from positive to modestly negative. And in the US, given where valuations are\u2014I hate to be a downer\u2014but you have an elevated risk of a lost decade in the US stock market.<\/p>\n

So, you can see the stakes are high between this tug of war. And this was the eye-opener to me. It\u2019s over the next seven or 10 years, that\u2019s why I felt compelled to help investors, because as an economist, I can\u2019t say, \u201cHey, there\u2019s two doors we go down. There\u2019s a good one and there\u2019s a not-so-good one. Good luck to you with investing.\u201d So, we try to push ourselves to say from a risk management perspective, how can I think about a portfolio that\u2019s kind of resilient to both scenarios?<\/p>\n","protected":false},"excerpt":{"rendered":"On this episode of The Long View, Joe Davis, global chief economist at Vanguard and global head of…\n","protected":false},"author":2,"featured_media":407955,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3090],"tags":[51,1700,16,15],"class_list":{"0":"post-407954","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-economy","10":"tag-uk","11":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/115169034501456646","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/407954","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=407954"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/407954\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/407955"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=407954"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=407954"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=407954"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}